Part Four: The Outsiders
Grain and oilseed markets have their own factors that directly affect their price on a daily basis. Weather and supply and demand factors would be considered the most affective. However, a novice trader in the grain and oilseed markets may not be aware of other existing markets. These markets are called “outside markets”, and they have become a very important price mover in the past few years.
An “Outside Market” is considered to be any organized market that is not a part of the grain complex but can still influence their prices. There are many of these markets, both big and small. However, the main three markets that traders watch daily are: Crude Oil, the US Dollar, and the Dow Jones. In recent years, grain and oilseed markets have become more of a world market. Overnight price movement in the US is typically influenced by action in other markets during their normal trading hours.
Given the popularity of bio-fuel over the past few years, crude oil and its affect over the grain and oilseed markets is more significant than it has ever been. Crude oil is affected by Ethanol and Bio-Diesel Production – if the price of crude oil is higher, it is considered supportive to the grain and oilseed markets. Simply put, if the price of crude oil increases, it supports bio-fuels because, in a sense, their demand increases to refiners and consumers. Soybeans are used for the production of bio-diesel or for a blend in regular diesel. Corn is used for Ethanol as a substitute for gasoline but is more popularly blended with regular gasoline. As the price of crude oil stays high, likely will the demand for these alternative fuels.
The US Dollar affects the grain and oilseed markets just as it affects commodities in general. On a day when it seems as if every market is selling off, take a look at the US Dollar â€“ it will likely be higher during that day’s trading session. A rising dollar is non-inflationary which results in eventually lower commodity prices over time. Investors typically buy commodities to hedge against inflation. When the dollar is weak or has been weakening, it signals that there may be anticipation of inflation in the coming future. More directly, a lower dollar looks attractive to foreign grain and oilseed buyers since their cost of purchase will essentially be lower.
Dow Jones Industrial Index (DJIA)
The Dow typically has little correlation with the price movement in the grain and oilseed markets. However, it is worth mentioning due to its more direct affect as of late. Investors have been trading in more of a risk on / risk off fashion. In the past, if the stock market was rising, commodity prices would decrease due to reduced inputs costs for companies. When commodity prices were higher, it would cost more for a company to purchase those goods, thus slowing growth. Now, if the Dow is up 300 points during a trading session, it seems as if commodity prices are as well. One important thing to keep in mind is that when more confidence and certainty is established in our markets and future, the strong stock market/lower commodities will likely come back into play.
The outside markets mentioned above should be used as a tool in your trading and hedging arsenal. When research is conducted, never leave these out. It is important to have a solid awareness of them when formulating trading or hedging decisions.